SBI’s $1 bn promise to Adani group: The public bank has a lot of explaining to do

The Rs 6,200 crore loan agreement the State Bank of India (SBI) signed during Prime Minister Narendra Modi’s Australian visit to fund Gautam Adani’s Carmichael coal project in Queensland has been questioned on the basis of its merits, with the proposal evoking sharp criticism from Congress party as it alleged that Modi is promoting Adani and is using the government lender to come to the aid the industrialist.

The critics have primarily the following questions: Why did SBI decide to give a $ 1 billion loan to a project, whose previous attempts at fund raising were was turned down by several international banks who cited non-viability of the project? Also, Adani’s bigger coal rivals in Australia, such as BHP Billiton and Glencore, have shelved coal developments in the backdrop of Australia’s coal industry making losses. What is the guarantee that SBI won’t burn its hands by lending to Adani for such a project?

SBI has defended its position saying it has only signed a memorandum of understanding with Adani to extend credit facilities. The actual disbursement will happen only after assessing the details of the project and being convinced about the merits, the lender said.

According to SBI chairman Arundhati Bhattacharya, after repaying an existing loan to the bank, the net fresh funding to Adanis will be $200 to $400 million (about Rs 1,200 crore to Rs2,500 core).

Probably, here are the larger concerns that SBI should address:

One: Using part of the fresh loan from the same lender primarily to repay an old existing loan amounts to ever greening of the loan or clandestine restructuring, something which the Reserve Bank of India (RBI) has been cautioning banks against over the years. That is particularly important if the future cash flows from a particular project, for which the money is given, is doubtful.

Two, if the $ 1 billion loan is indeed intended for the Carmichael coal project and the partial repayment is for loans drawn earlier for other projects in the group, then that becomes a case of a diversion from the stated end-use ( assuming that the stated use in this case is the development of the Carmichael project.) Is that the case?

Or else, if it is a top up loan for the same project, it would, in fact, add to the repayment burden of the company since the total outstanding increases if the project doesn’t turn out to be profitable.

Ever-greening has been a problem with the Indian banking sector and is the reason for pile up of hidden stressed assets in the form of restructured advances.

Any banker would admit that of the Rs 6 lakh crore of loans are currently being recast under various channels—bilateral restructuring and corporate debt restructuring—there is a significant chunk of hidden bad loans. The reason is that in several cases companies didn’t deserve loan recasts and got the facility through understandings achieved in state-run banks thanks to political influence.

In such cases, what really happens is a bank loan, which is practically a bad loan, is maintained as a standard account through some sort of top up loan or easing of norms. This is done in the mutual interest of the lender and borrower. Let’s admit that Indian banks are neck-deep in bad loans and the problem is huge. It’s high time caution is exercised.

About Rs 2.6 lakh crore of the total loans given by banks are already bad. Besides the genuine reasons such as economic slowdown, a major part of the bad loans can be attributed to careless, imprudent lending by banks to large corporations.

As at end September, Adani enterprises have total debt of Rs 72,632 crore, which includes long-term debt of Rs 55,365 crore and short-term debt of Rs17,267 crore. As an earlier Firstbiz article pointed out, the group’s ability to repay its debt obligations is perceived to be weak as reflected in its declining interest coverage ratio.

RBI governor, Raghuram Rajan, in the past had highlighted the danger of rampant evergreening on stressed assets.

“Ever-greening is trying to ignore the problem and taper over for later period and thus create large problems in future,” he had said.

In Adani’s case, given the political and public attention on the deal, SBI will be complicating the whole affair if it is not clear on the actual use of the promised money.

There is not much strength in SBI’s argument that the transaction is not done and it is just an agreement. Such a major proposal, announced at a foreign venue presided by heads of nations, must be followed up with actions. The question here is where exactly will the money SBI plans to give Adani group be deployed?

If a good chunk of the money goes to clean up the balance sheet of Adani and evergreen its old debt, the whole exercise will set yet another bad precedent in Indian banking, which is presently struggling to tide over a bad phase.